Exploding a Myth About Netflix
I have Netflix on the brain because I currently do not own any individual stocks, am famiiar with the company and am very tempted to get back in on the gruesome price drop. I have been reading articles from many bulls and bears and am trying to walk through the most basic logic of each first.
Onto business. You ever notice how rich people are the cheapest bastardos in the world? No joke, one of my wealthy relatives once tried to get a refrigerator salesman to remove the light from the freezer so he could pay less for it, suggesting he could use a flashlight if he wanted a snack at night. Same guy brought a car salesman to tears after he demanded, at the end of the negotiation, they remove the floor mats because he could buy them cheaper at Wal-Mart.
The point being Netflix's recent price drop explains, finally, and once and for all, that distributing content via a subscription model is a miserable, low-margin business. It's a business the disrtibutor has little control over as the studios can demand exorbitant prices. So, yeah, though Apple, Google, Amazon, Wal-Mart and the revived Blockbuster have lots of cash, some of them ridiculous amounts of cash, I have been stunned to see them refuse to go all-out and take on Netflix head on. But it's clear now, after this price drop, that the reason they have not done so is because they do not like to waste money. That's why they have so much money in the first place. They look at this space and see two things- 1) it's hard to make money 2) there's all ready a well-established - and I still think beloved - brand in place.
The idea that Netflix has direct competition is a myth. They don't.
The only viable bear argument is one Michael Pachter has been making forever, which is the same one being made (brutally so) by Seeking Alpha contributor Rocco Pendola - that the Netflix model is inherently broken. They believe costs related to marketing, expansion and most of all content acquisition will overwhelm revenues and make the company inherently unstainable.
Regardless of recent missteps no bears to my knowledge really believe Reed Hastings is incompetent. Pendola relentlessly assails Hastings for what he considers lack of transparency, and pretty much accuses the company of conducting unethical accounting practices. But no one doubts Hastings' skill as a businessperson. For a decade his execution was flawless - acquiring content cheaply to get lift-off, getting on every concievable device - most notably on the iPad at launch, and sticking to his story - killer value, in all marketing from day one.
As a real-life individual investor who does not have the time to fully investigate stocks, I have no choice but to do what I reserach I can, lean on intiution and make the best call I can, if I make one at all. Which I probably won't as I'm starting to rank stock prediction up their with reading entrails of animals in the high bush.
But any thesis in Netflix comes down to one essential question and one only: Is distributing films and TV shows, via subscription model, a viable business? If it is, Netflix is a great investment. And one can easily see them getting to 35M subs and beyond in a global market place. it also seems entirely possible to me they do some sort of Facebook integration and find new ways of generating revenues.
If it is not they, obviously, will not exist down the road. But they will NOT be killed by direct competition. No chance. Bears cannot have it both ways. They can't argue that competition will kill Netflix, because why would any established player come hard into a space that a) sucks and b) has someone all ready at war for survival in the space with a 100% pure focus on that space? (another thing Reed still deserves massive credit for.)
So, I hope that Foolish analysts and other bloggers will focus sharply on the most important issue: is the business model sustainable? If it is, this is an easy double from here. If it is not, individual investors could lose the whole enchillada.Hard to see any middle ground on this one.
A Forbes article on the ultimate Wall Street Wiseman, Whitney Tilson going long Netflix here. (note the part about Tilson having a SMALL position and hoping to add shares cheaper.)
A brutal bear case - Rocco Pendola interviews uber-Netflix bear, Len Brackman here.
PS - Man, watching Whitney Tilson discuss stocks really makes me long for the days when the essence of Fooldom was to mock the arrogance of the wise men of wall street. He lays out his arguments - "We think Netflix will add X number of subsribers at Y rate as Z happens" as if he just got off the phone with God himself and has just been awarded stone tablets of absolute truth. He is obviously exceptionally inteliligent, but every time I hear him speak I long to see the guy who made a fortune selling plastics in "It's a Wonderful Life" rush up to him, flick his hands off his donkey ears and shout, "Hee haw!" Still my gut is with him now.